The updated guidance aims to put the onus of providing evidence to support an asset’s market valuation directly onto the SMSF trustee’s shoulders.

And as always, SMSF auditors must use their professional judgement and review whether trustees have provided sufficient appropriate audit evidence.

Frequency of valuations

The ATO has updated its lexicon, replacing “external valuation” with “valuation by a qualified independent valuer”.

Using this as a preferred term enables the ATO to clarify how frequently a valuation from a qualified independent valuer is required.

Where trustees obtain a valuation by a qualified independent valuer during the year, they are not required to have a valuation undertaken each year unless a significant event has affected an asset’s value.

These events include a natural disaster, global pandemic, macroeconomic event, market volatility or changes to the character of the asset.

And at this point, the ATO heads into fresh territory by making SMSF trustees take more responsibility for their market valuations.

SMSF trustee new responsibilities

SMSF trustees now have new responsibilities when they rely on a qualified independent valuation from the prior year. The guidelines now state they need to:

1. Assess whether it is still appropriate to use
2. Document how they came to this conclusion

The ATO has created a new risk paradigm for SMSF trustees by having them validate that the asset is recorded correctly in the fund’s financials before the SMSF auditor.

Property valuations

In October 2020, the ATO threw the SMSF industry a curveball by stipulating that where a kerbside valuation relies on comparable sales only but does not list them is unacceptable.

Under these circumstances, SMSF trustees needed to ensure that the kerbside valuation included comparable sales (best practice is to use at least three), which added considerable time and resources to complete the audit.

Realistically, the ATO’s market valuation guidelines only support what the auditing standards already require SMSF auditors to do under their professional obligations.

There has been a slight shift in the cosmos, however, because the ATO previously said that the valuation MUST stipulate the supporting data and include comparable sales if the kerbside valuation relies on comparable sales.

Contrast this with the updated guidelines that say that the valuation SHOULD stipulate the supportable data (read comparable sales) if it is the sole source of evidence relied upon to substantiate the valuation.

The ATO appears to have softened its approach.

SMSF auditor responsibilities

SMSF auditors are responsible for the final risk assessment of a valuation. While the auditor’s role is not to value fund assets, they must check the market valuation of the asset and the objective and supportable data.

An SMSF auditor uses their professional judgement to ensure they have sufficient appropriate audit evidence on which they can rely that the fund’s financials are fairly stated.

The situation is a catch-22 because if the trustee fails to do their job correctly, SMSF auditors cannot meet their professional obligations under the auditing standards.

Risk management

SMSF auditors must still exercise their professional judgement to confirm compliance with r8.02B SISR, which could result in an audit query to ensure they meet their obligations.

As ACR (Auditor Contravention Report) reporting has recently changed because of the new independence requirements, there may be further developments if SMSF auditors do not receive sufficient appropriate audit evidence to substantiate market values.

One way of risk-managing this situation could be through s35C SIS, which requires SMSF trustees to provide information to their auditor within 14 days of a request being made.  

Where the information is not forthcoming, and there is a breach of r8.02B, an SMSF auditor may choose to mitigate risk and potential future litigation by proving they have requested the evidence that supports the valuation.

A lack of audit evidence for market valuations is the primary reason the ATO refers SMSF auditors to ASIC.

Including a breach of s35C SIS might be an option for those risk-averse SMSF auditors who prefer to have concrete evidence when (potentially) facing the ATO.

Investments without a ready market

The ATO considers that it is the trustee’s responsibility to know the value of the asset, the potential for capital growth and the capacity to produce income.

An asset that has no known value or potential for growth or income would not be a prudent investment. The reason is that it will not be able to support the member’s retirement goals and does not comply with the sole purpose test.

Where a fund held this type of asset, it would most likely breach s62 SIS.

Conclusion

The ATO has provided a subtle and welcome shift to risk-managing market valuations. SMSF trustees must now document why they accepted a qualified independent market valuation in a subsequent year.

Additionally, there is no longer a strict requirement to provide comparable sales when it is the only evidence listed in a valuation.

While the ATO has provided a softened approach to its market valuation guidelines, SMSF auditors will continue to apply their professional judgement and ensure that sufficient appropriate audit evidence is on their audit file.

By Shelley Banton, head of education, ASF Audits